by Al MartinEconomic Predictions for 2014
(1-7-14) So what is going to happen to the global economy? The answer to this question is divided into two camps. The financial media shills and the speakers of GovLie who keep trying to proffer this idea that not only the United States economy but also the Europe and Asia economies have reached what economists call “escape velocity.” They claim that GDP has improved so much thanks to massive “quantitative easing” i.e. endlessly injecting more monetary stimulus into the global Hopium Cloud and that stimulus may be gradually withdrawn because it is no longer necessary. Since “escape velocity” has been reached, the global economy can now rebound without the monetary stimulus crutch.
And who’s promoting this concept? Everyone who has a vested interest in it. Financial media shills. Retail wire-house touts. And governments themselves, of course.
The other side of the equation is largely being promoted by the most renowned economists – those that governments do not rely on. They claim that no economy – US European and Asian – is anywhere near “escape velocity.” They say that underlying economic statistics do not point that out and to withdraw fiscal stimulus at this point is a mistake. They say that we are in a “false start” such as we have seen in 2010, 2011 and 2012 and if fiscal stimulus is withdrawn, it will lead to a sharper decline after the first half of the year whereupon even more monetary stimulus will be necessary to try to pick up the global economy again. Mark Faber would be in this category and so would George Soros. People who actually understand markets and who don’t have any vested political interest or economic interest in seeing markets move higher and GDP increases are promoting the idea that it is too soon to withdraw fiscal stimulus. They point out quite correctly that it is only the United States that is withdrawing fiscal stimulus. The QE programs of Japan and China are being increased. The Bank of England’s QE program is staying intact. The ECB is going to come out with another big shot of fiscal stimulus most likely in January or February. In other words, the United States is the only country that’s withdrawing stimulus.
What does “withdrawing stimulus” mean? It means tapering off US Bond purchases, thereby reducing injections of monetary stimulus. Meanwhile the Fed governors are sharply – and evenly -- divided on the issue. There are none of them who think that monetary stimulus should be withdrawn because “escape velocity” has been reached. Monetary stimulus is like nasal decongestant in that the more you use it the greater the so-called “rebounding” effect it has. Thus you’ll have to use more of it down the line. In other words, markets become increasingly immune to continuous monetary stimulus in that monetary stimulus can only support a certain level of overvaluation of assets and to support the same level of overvaluation over a longer period of time requires ever larger doses of monetary stimulus.
Meanwhile Janet Yellen, who is slated to become the new Fed chair, is the leader of the dovish faction in the Fed. The “doves” are the ones who want to continue to provide monetary stimulus. “Hawks” are the ones who want to withdraw it. There’s no question that the Fed is going to withdraw monetary stimulus. The only question becomes -- at what rate?
Yellen will want to slow the rate of reduction of monetary stimulus as much as possible because she is a believer as all the Keynesian believers are in perpetual monetary stimulus. Then it becomes more prescient now than ever before because the planet’s central banks are being effectively prevented by hamstrung and ineffective governments to put onto their monetary shoulders, so to speak, the entire load, as it were, of providing economic stimulus since governments can not produce any tandem fiscal stimulus like tax reductions.
Here’s the setup. My prediction would be that in fact it is too soon to withdraw monetary stimulus and that the US economy and every other economy has not reached so-called “escape velocity.” I also think that the reduction of the monetary stimulus by the Fed will prove to be a mistake and that in the second half of 2014 they will have to not reduce but increase monetary stimulus to make up for the damage that was done by reducing it in the first half.
So how will we know? One of the effects which we have already seen and which will become more pronounced will be the higher interest rates which will result from reduced monetary stimulus. The negative implications of this are already being felt in the housing market, Housing prices are one of the three big linchpins of consumption in the economy, wherein we have seen existing and new home sales falling which is a direct result of interest rates rising and getting ahead of the curve as they say. Interest long rates are rising in anticipation of a reduction of the fiscal stimulus. The other hit in asset prices has to come in equity prices because by reducing fiscal stimulus, you are taking away the “free cheap money” that has supported both equity and commodity prices far beyond their underlying fundamental economic valuation.
We have already begun to see the impact of this in commodity prices which tend to get ahead of the curve more so than equity prices. For instance, the price of Oil and industrial metals has fallen sharply in the last week of the year. This is in anticipation of an economic slowdown that is going to be brought on by an increase in interest rates and a reduction in monetary liquidity, i.e. a reduction in the availability of cheap money which has supported all asset classes.
Look at how statistics regarding housing, car sales, durable goods sales, tangible collectables like wine, coins, and stamps indices have fallen in the last 30 days –simply in anticipation of a reduction in liquidity, i.e. cheap easy money.
What has not occurred yet and what is always the last asset price to fall in a higher interest rate/ reduced liquidity environment is stock prices. They are always the last to fall – and they are still increasing thanks to the job the shills have been doing which is getting the Unwashed to continue to buy – based on this concept that “escape velocity” has been reached and don’t worry higher interest rates are actually good for stock prices. This is the Old Bullish Lie that if interest rates are going higher, it must mean that economic activity is increasing and demand for money is increasing. That is one of the Oldest Bullish Lies in the book that you hear every day in financial media.
So who’s supporting these overvalued stock prices? As we have said before, Joe Six Pack buyers are out of the market on an individual basis—but he continues to plow money into his IRA and 401K accounts every month which goes into funds that then buy stock. Joe thinks he’s out of it but he really isn’t. Joe doesn’t know it’s not bacon. He doesn’t know where his IRA and 401K money is going.
To sum it up, equities are always the last asset class to fall in a false start environment. We have already had false starts since the 2008 debacle. Now is not the time to be withdrawing liquidity during the first week in January which is traditionally an up time for stocks. Now you see the first two days of the month where professional short sellers like me have been hitting the bids that have been coming out of IRA and 401K first of the month funds. Any rallies then should continue to be sold both in equity and commodity prices.
In conclusion, it is too early to withdraw monetary stimulus. There are still too many problems out there. The European banking situation is still critical and are not anywhere near what European politicians have claimed it has been. The US banking situation is equally precarious despite the proselytizing of what people in Washington and the banks themselves are saying. If it wasn’t the case both US and European banks wouldn’t be asking for opt out or exemptions from the Basel III accord. Banks are very tenuous in the United States. China is a disaster waiting to happen since not only are all of its banks underfunded but they are negatively funded as are most of the Japanese banks. Global debt levels are at record rates. Now the banks of the G20 nation-states have a median GDP to debt ratios of 100%. These are numbers that not only have never been reached before in history but have never been envisioned or thought that the planet’s economy could be sustained when debt to GDP ratios rose above 100%.
The Bullish Shillism will continue and you won’t see the debacle happen right away but that any further rallies in asset prices should be used as a shorting opportunity and again we reiterate -- if you’re a seller of real estate, now is the time to do it because real estate is declining…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.